Land Speculation as a Cause of Deforestation : The Role of Cattle Ranching in the Humid Tropics of Costa Rica

This paper examines the effect of land speculation on investment decisions by cattle ranchers in Latin America, and the subsequent consequences for deforestation under varying levels of land price uncertainty and interest rate subsidy. Based on the Neoclassical investment theory, a stochastic reversible investment model with adjustment costs is developed in which land prices are modeled as a geometric Brownian motion. Analytical results indicate that: 1) the optimal rate of investment is dependent on the price of land at a specific moment in time, 2) the value of the farm increases with the variance in land prices due to speculative returns from land, and 3) the maximum farm size attained over time will be larger, the larger the variance in land prices. For the numerical example of an average cattle rancher in the Atlantic Zone of Costa Rica, it is shown that lower fluctuations in land prices lead to a reduction in these speculative returns, as well as a reduction in the maximum farm size attained over time. This effect is further reinforced in combination with lower interest rate subsidies. Consequently, it can be concluded that variability in land prices alone is a sufficient condition for land speculation and subsequent deforestation of agrarian frontier areas by cattle ranchers in the Atlantic Zone of Costa Rica, and that this deforestation is further promoted by subsidized livestock credit